The latest existential threat to the CFPB: legal challenges to its funding
The Consumer Financial Protection Bureau is once again facing an existential threat in court — this time over whether the Federal Reserve’s funding of the agency is constitutional.
Earlier this month, five judges of the United States Court of Appeals for the Fifth Circuit reported their view that the CFPB financing mechanism violates the Constitution’s separation of powers because it occurs outside of the Congressional appropriations process.
The opinion is non-binding and the five justices represent less than a third of the 17 active justices on the Fifth Circuit Court of Appeals. Yet a decision of the Court of Appeals for the Second Circuit in another legal challenge to the source of the CFPB’s findings is expected within the next six months.
Compared to the CFPB’s previous legal challenges, the cases pending in the appeals courts have a better chance of disbanding the agency entirely and invalidating all actions taken by the bureau since its creation in the Dodd-Frank Act of 2010, say the lawyers.
“It’s another big storm cloud for the CFPB,” said Alan Kaplinsky, senior counsel at Ballard Spahr. “If a court finds the appropriations language to be unconstitutional, that really puts the CFPB at risk.”
Two years ago, the Supreme Court ruled in Seila Law LLC v. CFPB that the single director structure of the office was unconstitutional. But this decision left the agency and all of its rules and actions intact.
The reason for this is that Congress included in Dodd-Frank what is called a severance clause, which allowed certain provisions deemed illegal to be struck down while the law could remain in force.
In a 5-4 split decision, Chief Justice John Roberts ruled that a sitting president can fire the CFPB director for any reason. The result was that the so-called “for cause” provision in Dodd-Frank was simply deleted. The agency’s past actions were then ratified by former CFPB director Kathy Kraninger.
But there is no severance clause for the CFPB financing mechanism. If an appeals court were to find that the CFPB’s funding source is unconstitutional, it would pose a far more serious threat to the agency’s viability, the lawyers said.
“It’s likely that the Supreme Court will eventually decide the funding issue,” said Rich Samp, senior litigation attorney at the New Civil Liberties Alliance, a nonprofit law firm that litigates against federal administrative agencies. .
Samp said he advised the targets of recent CFPB enforcement actions to challenge the CFPB funding mechanism.
In the Fifth Circuit case, the concurring opinion of the five judges who opposed the CFPB funding mechanism has no binding effect but could influence other cases, Samp said. Three of the five justices who found the funding structure unconstitutional were appointed by former President Donald Trump.
U.S. Circuit Judge Edith Jones, who was appointed by former President Ronald Reagan, has written that if Congress allows the CFPB funding structure to remain, there will be no limit to bypassing the appropriations process. .
“Congress can no more legally curtail its own obligation to regularly appropriate money than it can abdicate that obligation entirely,” Judge Jones wrote. “If the CFPB funding mechanism survives this litigation, the camel’s nose is in the tent. When the conditions are right, the rest will follow.”
Still, the judges concluded that the CFPB can continue to litigate a 2016 Case filed against All American Check Cashing, a Mississippi check cashing and payday lender with 50 stores in three states. Court of Appeal fired the case in district court.
“The five justices found that in fact the CFPB continues to be unconstitutional because of this funding mechanism, and that issue would likely be much bigger than what was addressed in the Seila Law decision,” Samp said. . “I personally think it is, and it’s an issue we raise in the second circuit.”
CFPB advocates note that as a banking regulator, the CFPB is not alone in being exempt from the purse strings of Congress.
All other federal banking regulators – including the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Federal Reserve and the Federal Housing Finance Agency – are funded by examination fees or other sources such as deposit insurance valuations. These funding mechanisms were designed primarily to make the agencies independent and free from the political process.
Republican lawmakers recently raised the CFPB’s latest legal challenge, raising concerns in hearings that the agency is not subject to the appropriations process. Republican lawmakers appear to be introducing bills to settle the office’s funding source.
Some lawmakers have said the CFPB is not a prudential regulator and argued that its funding structure should instead be similar to those of the Federal Trade Commission and the Securities and Exchange Commission, which receive appropriations from Congress.
“The questions you receive from many members are justified because the CFPB, unlike other independent agencies such as the SEC or the FTC, does not depend on the appropriations process of Congress,” said Rep. Bryan Steil. , R-Wisc., at CFPB. Director Rohit Chopra last month during a House Financial Services Committee hearing.
In fiscal year 2021, the CFPB requested $596 million of the $717.5 million available in transfers from the Fed.
Kaplinsky said that even if Congress were to amend Dodd-Frank — an impossibility given the body’s partisan rifts — there might be no way to salvage the CFPB’s past actions.
“I think it’s a real worry in the office now, how is this all going to play out,” Kaplinsky said.